62 Business The Economist June 4th 2022
Powerless proxies
A
nnual general meetings(agms) of shareholders used to be
dull affairs. A company’s owners would gather to elect board
members or, after the global financial crisis of 2007-09 exposed
the gulf between fat-cat bosses and their workers, cast (mostly
non-binding) votes on executive compensation. In the past few
years, though, they have turned into corporate confessionals, with
nothing short of a company’s soul at stake. Motions are proliferat-
ing on decarbonisation and diversity targets, political donations,
workers’ rights and much else besides. A record 592 environmen-
tal and social proposals were filed in America ahead of this year’s
agmseason, which spans May and June. In the 20 years from Ama-
zon’s initial public offering in 1997, the e-empire’s shareholders
voted on 22 resolutions brought by fellow investors. At the latest
agmon May 25th they were asked to weigh in on 14. How can the
harried fund manager keep track?
Enter proxy-advisory firms, hired by investors to sift through
the resolutions and make recommendations on which boxes to
cross. There may be no monopoly in the market for ideas, but
when it comes to proxy advice the market is a cosy duopoly. Insti-
tutional Shareholder Services (iss) and Glass Lewis meet more
than 90% of the demand for such counsel in America.
The pronouncements of these corporate philosopher-kings
grew in prominence after 2003, when new rules required Ameri-
can institutional investors to disclose their voting polices. For
most investors it is cheaper instead to outsource the task to issor
Glass Lewis. The work is lucrative. In 2021 iss, which has annual
revenues in excess of $250m, was bought by Deutsche Börse, a
German exchange operator, for $2.3bn. The same year two Canadi-
an public pension funds sold Glass Lewis to a private-equity firm.
The duo’s recommendations carry weight. One study identi-
fied 114 institutional investors, representing more than $5trn in
assets under management, who “robovoted” in lockstep with ei-
ther issor Glass Lewis during the 2020 proxy season, mechanical-
ly deferring to their recommendations. It is difficult to tell how a
shareholder would have voted but for a proxy recommendation.
Still, the advisers have almost certainly moved the needle in some
important shareholder votes (and in plenty of unimportant ones,
too). They have also wielded a softer power, moulding the ever-changing norms of corporate governance through changes in their
voting policies and other public displays of wisdom. No press cov-
erage of an important agmis nowadays complete without a nod to
their stance, as when the media leapt on iss’s recommendations
that dissented from Amazon management’s guidance on nine
issues, from executive pay to human-rights due diligence, plastic
use and gender and racial pay gaps.
As shareholders’ concerns expand from narrow profits to
broader “purpose”, you would expect the advisers to be enjoying a
golden age. In fact, their proxy power may start to decline, for
three reasons. The first is structural. In the past decade share
ownership in America has become ever more concentrated in the
hands of giant asset managers such as BlackRock, State Street and
Vanguard. These behemoths run their own departments of cor-
porate-governance consigliereand so have little need for the proxy
advisers’ services.In 2008 the trio between them owned 13.5% of
the average company in the s&p500 index of big American firms,
according to Bloomberg, a data firm. They now hold nearly a quar-
ter. In May BlackRock struck a cautionary note on environmental
and social resolutions, noting that these were becoming prescrip-
tive to the point of micro-management. Smaller institutional
investors may prefer to side with their bigger peers rather than the
proxy firms in such matters, especially if the concentration of
ownership continues to rise.
Second, managements are putting up a fight. This year’s votes
are still being tallied, but environmental and social resolutions
have not had the knock-out run their backers expected, in part be-
cause companies that were caught off guard last year got their act
together. On May 27th Twitter went further, announcing in a reg-
ulatory filing that it would ignore a shareholder vote which booted
Egon Durban, a billionaire tech dealmaker, off the social-media
firm’s board, citing the influence of proxy advisers on the result.
isshad recommended evicting Mr Durban because he sits on six
other public-company boards. That makes him “overboarded” in
iss’s eyes. Twitter retorted that Mr Durban is a “highly effective
member” with “unparalleled operational knowledge”. Merely sit-
ting on more boards than the isslikes should not automatically
disqualify him, the company implied.
In 2019, 319 companies signed a letter chastising a lack of trans-
parency and accuracy in proxy advisers’ recommendations and
calling for regulatory action. Soon afterwards the Securities and
Exchange Commission (sec), which had dithered for years, finally
began to rein in the proxy firms—the third challenge to their role.
In 2020 the secadopted new rules requiring increased disclosure
of potential conflicts and open channels of communication be-
tween proxy advisers and companies. Last November the agency’s
current head, Gary Gensler, watered down some of those amended
rules, for example removing the requirement that proxy advice be
sent to the management allowing it to respond. But they remain
less proxy-friendly than in the past.Annual general mayhem
Clashes pitting the proxy advisers against big investors, manage-
ment and regulators look poised to intensify—all the more so if, as
seems likely, agms continue to be a venue for some investors to
push their politics. Asking two opaque firms, supposedly in the
name of transparency, in effect to nominate America Inc’s boards
of directors was dubious enough. Trusting them to resolve the
complex trade-offs at the heart of 21st-century capitalism would
be a travesty. Schumpeter
The golden age for the dispensers of shareholder counsel is over